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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SHRI G.D. AGRAWAL, HON’BLE & SHRI KULDIP SINGH
PER: KULDIP SINGH, JM
Since identical questions of facts and law have been raised in both the aforesaid inter connected appeals, the same are being disposed of by
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way of consolidated order for the sake of brevity and to avoid repetition of
discussion.
The Appellant, Motorola Inc 1303, Algonquin Road Schaumburg,
Illinois, USA, (hereinafter referred to as ‘the Assessee’) by filing the
present appeals, sought to set aside the impugned orders dated
20.09.2010 qua Assessment Years 2002-03 & 2003-04 respectively passed
by Ld. Dispute Resolution Panel-II, New Delhi, on the identical grounds
that:-
Assessment Year 2002-03
“Based on the facts and circumstances of the case, Motorola Inc (hereinafter referred to as ‘the Appellant’), respectfully submits in respect of the order passed by the learned Deputy Director of Income -tax, Circle 3(2), New Delhi under section 144C(13)/147 of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) on the following grounds:
Reassessment proceedings bad in law
On the facts and in the circumstances of the case and in law, the learned Assessing Officer (‘AO’) has erred and the Hon'ble Dispute Resolution Panel (‘DRP’) has further erred in confirming the AO's action of reopening the assessment proceedings under section 147 of the Act by issuance of notice under section 148 of the Act dated 03 October 2008, after the expiry of four years from the end of the relevant assessment year. Thus, the impugned order passed under section 144C read with section 147 of the Act is without jurisdiction, bad in law and liable to be quashed; 1.1 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the AO's action of reopening the assessment proceedings under section 147 of the Act, after the expiry of four years even when there was no failure on the part of the appellant to fully and truly furnish all the material facts necessary for assessment; 1.2 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the AO’s
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action of reopening the concluded assessment merely on the basis of change of opinion on facts already present at the time of original assessment proceedings u/s 143(3) of the Act; 1.3 On the facts and in the circumstances of the case and in law, the learned AO has erred in not considering the detailed submissions made by the appellant during the reassessment proceedings and completely disregarding the judicial precedents relied upon by the appellant to meet the ends of revenue and the Hon'ble DRP has further erred in confirming the above action of the learned AO. 1.4 That the impugned reassessment order as passed by the learned AO u/s 144C read with section 147 of the Act concluding the reassessment proceedings as confirmed by the Hon'ble DRP u/s 144C(13) read with section 147 of the Act is, therefore, bad in law and requires to be annulled.
Fee received by the appellant
On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of treating the fees received by the appellant from Motorola India Electronics Private Limited (‘MIEL’) and Motorola India Private Limited (‘MIPL’) as Fee for Included Services (‘FIS’) and taxing the same at the rate of 20% as per the provisions of Article 7 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and USA read with section 115A and section 44D of the Act; 2.1 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in not appreciating that the amounts received by the appellant are mere reimbursement of expenses on a cost to cost basis and hence, the same are not chargeable to tax in India; 2.2 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in holding that the fees received by the appellant from the Indian Companies i.e. MIPL and MIEL are in the nature of FIS within the meaning of Article 13 of the DTAA); 2.3 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in proceeding on the assumption that the appellant has a permanent establishment in India; 2.4 Without prejudice to the objection mentioned in 2.3 above, on the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon’ble DRP has further erred by holding that the fees received by the appellant from the Indian companies are connected with alleged permanent establishment in India; 2.5 On the facts and in the circumstances of the case and in law, the learned
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AO has erred in ignoring the submissions of the appellant and the judicial precedents cited during the reassessment proceedings and the Hon'ble DRP has further erred in confirming the above action of the learned AO.
General 3. On the facts and in the circumstances of the case and in law, the learned DRP has erred in placing reliance on its observation in appellant’s case for AY 2006-07 without granting the appellant any opportunity of being heard and present its case. 4. On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO in charging interest under section 234A, 234B and 234D of the Act. 5. On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of initiating the penalty proceedings u/s 271(1)(c) of the Income-tax Act on the ground that the appellant has concealed the true and correct particulars of its taxable income.
All the above grounds of objection are independent and without prejudice to one another
The appellant craves leave to supplement, to cancel, to amend, to add and/or otherwise to alter/modify any or all the ground(s) of objection stated herein above.
The above grounds are independent and without prejudice to each other.
The Appellant prays for leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal.”
Assessment Year 2003-04
“Based on the facts and circumstances of the case, Motorola Inc (hereinafter referred to as ‘the Appellant’), respectfully submits in respect of the order passed by the learned Deputy Director of Income -tax, Circle 3(2), New Delhi under section 144C(13)/147 of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) on the following grounds:
Reassessment proceedings bad in law
On the facts and in the circumstances of the case and in law, the learned
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Assessing Officer (‘AO’) has erred and the Hon'ble Dispute Resolution Panel (‘DRP’) has further erred in confirming the AO's action of reopening the assessment proceedings under section 147 of the Act by issuance of notice under section 148 of the Act dated 03 October 2008, after the expiry of four years from the end of the relevant assessment year. Thus, the impugned order passed under section 144C read with section 147 of the Act is without jurisdiction, bad in law and liable to be quashed; 1.1 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the AO's action of reopening the assessment proceedings under section 147 of the Act, after the expiry of four years even when there was no failure on the part of the appellant to fully and truly furnish all the material facts necessary for assessment; 1.2 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the AO’s action of reopening the concluded assessment merely on the basis of change of opinion on facts already present at the time of original assessment proceedings u/s 143(3) of the Act; 1.3 On the facts and in the circumstances of the case and in law, the learned AO has erred in not considering the detailed submissions made by the appellant during the reassessment proceedings and completely disregarding the judicial precedents relied upon by the appellant to meet the ends of revenue and the Hon'ble DRP has further erred in confirming the above action of the learned AO.
1.4 That the impugned reassessment order as passed by the learned AO u/s 144C read with section 147 of the Act concluding the reassessment proceedings as confirmed by the Hon'ble DRP u/s 144C(13) read with section 147 of the Act is, therefore, bad in law and requires to be annulled.
Fee received by the appellant
On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of treating the fees received by the appellant from Motorola India Electronics Private Limited (‘MIEL’) and Motorola India Private Limited (‘MIPL’) as Fee for Included Services (‘FIS’) and taxing the same at the rate of 20% as per the provisions of Article 7 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and USA read with section 115A and section 44D of the Act; 2.1 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in not appreciating that the amounts received by the appellant are mere reimbursement of
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expenses on a cost to cost basis and hence, the same are not chargeable to tax in India; 2.2 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in holding that the fees received by the appellant from the Indian Companies i.e. MIPL and MIEL are in the nature of FIS within the meaning of Article 13 of the DTAA); 2.3 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in proceeding on the assumption that the appellant has a permanent establishment in India; 2.4 Without prejudice to the objection mentioned in 2.3 above, on the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon’ble DRP has further erred by holding that the fees received by the appellant from the Indian companies are connected with alleged permanent establishment in India; 2.5 On the facts and in the circumstances of the case and in law, the learned AO has erred in ignoring the submissions of the appellant and the judicial precedents cited during the reassessment proceedings and the Hon'ble DRP has further erred in confirming the above action of the learned AO.
Supply/ licensing of software
On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon’ble DRP has further erred in confirming the action of the learned AO of treating the sums received by the appellant from licensing of software in India to Indian customers as royalty and taxing the same at the rate of 30% as per the provisions of section 115A read with section 44D of the Act; 3.1 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of treating the sums received by the appellant as royalty since the licensing of software is in the nature of outright sale of copyrighted article and not sale of the copyright; 3.2 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of treating the sums received by the appellant as royalty since the software is an essential requirement to make the hardware operational and hence, the sale of both the hardware and software are inextricably linked to each other; 3.4 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in proceeding on the assumption that the appellant has a permanent establishment in India;
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Without prejudice to the gorunds of the appellant in 3.1, 3.2 and 3.3 above, on the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred by treating the sums received by the appellant as royalty and taxing the same at the rate of 30% as per the provisions of section 115A read with section 44D of the Act since, as per the effective date of agreements entered into by the appellant with Indian customers, entire sums should not have been taxed at a rate which is than 20%; 3.5 On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in ignoring the submissions of the appellant and the judicial precedents cited during the reassessment proceedings.
General 4. On the facts and in the circumstances of the case and in law, the learned DRP has erred in placing reliance on its observation in appellant’s case for AY 2006-07 without granting the appellant any opportunity of being heard and present its case. 5. On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO in charging interest under section 234A, 234B and 234D of the Act. 6. On the facts and in the circumstances of the case and in law, the learned AO has erred and the Hon'ble DRP has further erred in confirming the action of the learned AO of initiating the penalty proceedings u/s 271(1)(c) of the Income-tax Act on the ground that the appellant has concealed the true and correct particulars of its taxable income.
All the above grounds of objection are independent and without prejudice to one another
The appellant craves leave to supplement, to cancel, to amend, to add and/or otherwise to alter/modify any or all the ground(s) of objection stated herein above.
The above grounds are independent and without prejudice to each other.
The Appellant prays for leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal.”
Briefly stated the facts necessary for adjudication of the
controversy at hand are: after framing the assessment by the Assessing
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Officer (AO) vide orders dated 22.3.2006 for A.Y. 2002-03 and 2003-04
u/s 143(3) of the Income Tax Act, 1961 (for short the ‘Act’), assessment
proceedings have been reopened by the AO by recording following
findings:-
• During the course of assessment proceeding u/s 143(3) concluded vide passing of assessment order dated 30 Mrch 2005, the assessee submitted copies of agreements with the group companies i.e. Motorola India Electronics India Pvt. Ltd. (MIEL) and Motorola India Limited (MIL). • A perusal of the above agreements revealed that the assessee had made those agreements after 31 May 1997, therefore, income from these agreements should have been taxed at 20% u/s 115A read with 44D of the Act instead of 15% as done by erstwhile AO.
The assessee filed comprehensive written submissions challenging
the impugned reopening by the AO. AO declining the contentions raised
by the assessee, reassess receipt of the assesseee company of Rs.
7,20,41,146/- on account of rendering services to its group companies in
India to be taxed @ 20% for A. Y. 2003-04 and order to tax the income of
the assessee of Rs. 105,252,213/- @ of 15% for A.Y. 2003-04.
The assessee carried the matter before the Ld. Dispute Resolution
Panel (DRP) by filing the objections on merit as well as legal grounds
which have been disposed off. Feeling aggrieved, the assessee has come
up before the Tribunal by way of filing the present appeal.
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We have heard the Ld. Authorized Representatives of the parties to
the appeal, gone through the documents relied upon and orders passed
by the revenue authorities below in the light of the facts and
circumstances of the case.
The Ld. AR for the assessee challenging the impugned order
contended inter alia that there is no failure or omission on the part of the
assessee company to disclose the true and correct facts necessary for
assessment; that in A. Y. 2003-04, the assessment was also reopened
beyond the period of 4 years and there are no allegation of failure or
omission on the part of the assessee company to disclose the true and
correct facts necessary for assessment of the income; that the only
dispute in both the years was as to the rate of tax applicable.
However, on the other hand, Ld. DR for the Revenue contended
that the assessee has not brought on record the fate of the appeal filed by
the assessee, before the Ld. CIT(A), against the order passed u/s 143(3)
of the Act, as at the application of the assessee that the present appeals
may be kept in abeyance till the disposal of the appeal before the Ld.
CIT(A) filed against the order passed u/s 143(3) of the Act, and relied
upon the decision rendered by Hon’ble High Court on reopening of cases
u/s 147 of the Act, cited as Oracle Systems Corporation vs. Assistant
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Director of Income-Tax (International Taxation) [2016] 380 ITR
232.
From the facts and circumstances of the case, grounds raised by
the Assessee in the appeal, arguments addressed by the Ld. Authorized
Representatives of the parties and the order passed by the lower Revenue
Authorities, the sole question arises for determination in this case is:-
“as to whether reassessment proceeding initiated by the AO u/s 147 of the Act are merely “change of opinion” as held by Ld.CIT(A) and that there is no failure on its part to disclose all material facts fully and truly necessary for assessment?” 10. To proceed further, we would like to extract the reasons recorded
by the AO for reopening the assessment proceedings for AY. 2002-03
ready perusal as under:-
Reason for reopening the case u/s 148 of the Income Tax Act, 1961 in the case of M/s Motorola Inc., A.Y. 2002-03 Return of income in this case was filed on 2-12-2003 declaring an income of Rs. 26,31,124/-. The assessment was completed u/s 143(3) of the Income-tax Act on 30.3.2005 determining total tax liability of Rs. 23,48,71,812/-. During the year the assessee company showed a receipt of Rs. 7,20,41,146/- on account of rendering certain services to its group companies in India i.e Motorola India Electronics Pvt. Ltd. and Motorola India Ltd. The Services were in the nature of fee for included services as customized technical & engineering services and other related services earlier rendered. The TDS certificates issued by the MIEL and MIL also showed the nature of payment as profession & technical services. Since the assessee has a permanent establishment in India and the agreement leading to the payment of such fees was made after 31st May, 1997, the receipt should have been taxed @
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20% u/s 115 r.w. Section 44D of the Income-tax Act instead of 15% which was applied in the assessment order. This resulted in escapement of income leading to loss of tax of Rs. 54.16 lakhs.
In view of this, I have reasons to believe that income chargeable to tax as mentioned above has escaped assessment for the A.Y. 2002-03. Approval may kindly be given to issue notice u/s 148.
Put up for kind approval of DIT.
Sd/- (Neehar Ranjan Pandey) Deputy Director of Income-tax Intl. Tax, Cir. 3(1), New Delhi.
Bare perusal of the reasons recorded for the purpose of reopening
shows that the facts recorded in the reasons have been picked up by the
AO from the Assessment Order completed u/s 143(3) of the Act, whereby
that the dispute as to the rate of tax has been raised by the AO by holding
that the assessee company has a permanent establishment in India and the agreement leading to the payment of such fees was made after 31st
May, 1997 and as such the receipt should have been taxed at 20% u/s
115A read with Section 44D of the Income-tax Act instead of 15% which
was applied in the Assessment order, which resulted in escapement of
income leading to the loss of tax of Rs. 54.16 lacs in A.Y. 2002-03 and
2.69 crores in A.Y. 2003-04.
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We are of the considered view that when all the facts have been
brought on record by the assessee during the assessment proceeding
completed u/s 143(3) of the Act, reopening the assessment after a period
of 4 years amounts to “change of opinion” which is not permissible under
law.
There is not even a vague allegation leveled by Assessing Officer in
the reasons recorded, that the assessee has failed on its part to disclose
all material facts fully and truly necessary for assessment. Only dispute
racked up by the AO for reopening is the difference in the rate of tax
which certainly amounts to “change of Opinion” for A.Y. 2002-03.
When we examine assessment order passed in this case u/s 143(3)
of the Act, it has come on record that the assessee company has brought
on record the complete facts as to rendering certain services to its group
companies i.e Motorola India Electronics Private Limited (MIEL) and
Motorola India Limited (MIL), for ready perusal, the operative part of the
assessment order passed u/s 143(3) of the Act is extracted as under:-
Taxability of fees received from Group Companies
The AR of the assessee vide letter dated 22.03.2005, the assessee stated that it had rendered certain services to its group companies in India i.e. Motorola India Electronics Private Limited (MIEL) and Motorola India Limited (MIL). As per the assessee the services were rendered in USA only. Further it was claimed that these services were in the nature of payment towards telecom
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charges, consisting of supporting computer resources, e mail, leased line charges and balance towards repairs and maintenance, training charges, manual charges, department charges etc. The assessee claims that the payment are not in the nature of “fees for included services” as defined under India-US Treaty. The AR of the assessee has been asked to furnish the copy of agreement under which above referred services were rendered. As per agreement the following services were rendered- • Marketing feasibility studies • Technical and Engineering Services • Electronic Data Base Management • Server Management/Desk top Services • Training • Financial /Administrative (Allocated management cost and GAC costs) services • Other services as may be agreed to by the parties.
A close perusal of the kind of services rendered will reveal that the services are in the nature of fee for included services. As customized technical & engineering services and other related services has been render. Even the TDS certificates issued by MIL and MIEL show the nature of payment as professional and technical services. As a result of above discussion, fee received by the assessee is chargeable to tax as FIS. Total amount of fee charged Rs. 7,20,41,146 Tax thereon @ 15% Rs. 1,08,06,172/-…..D Total Tax liability= A+B+C+D= Rs. 23,48,71,812/- Assessed.
Hon’ble Delhi High Court in the case cited as Oracle Systems
Corporation vs. Assistant Director of Income-Tax (International
Taxation) [2016] 380 ITR 232 decided the identical issue in favour of
the assessee by holding as under:-
“ Held, allowing the petition, that when the Assessing Officer accepted the assessee’s contentions that the Royalty was to be taxed under article 12(2) (a)(ii) at the rate of 15%. It has to be presumed that the Assessing Officer’s attention was attracted to
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the entire article 12of the Double Taxation Avoidance agreement. Moreover, the Revenue had been unable to pint out which material fact had not been disclosed fully or truly. Even the reasons did not specify or indicate which material fact had not been disclosed fully or truly by the assessee. The notice was not valid.”
Similarly, the Hon’ble Delhi High Court in case cited as Tractebel
Industry Engg vs. ADIT 198 taxman 408(Del) decided the identical
issue in favour of the assessee, the operative part of the Judgment as
under:-
“Section 147, read with section 90 of the Income-tax Act, 1961 and article 12 if DTAA between India and Belgium- Income escaping assessment-Non-disclosure of primary facts-Assessment year 2002- 03- Whether scope section 147/148 does not permit review of an earlier order on second though suo motu, when there is no new factual material to come to a different conclusion - Held, yes – Assessee, a company incorporated in Belgium, was engaged in providing technical services to various customers in India – For relevant assessment year, its assessment in respect of income from Indian Operations was completed under section 143(3) at rate of 10 per cent as per article 12 of DTAA between India and Belgium - Thereafter, Assessing Officer reopened assessment under section 147 on ground that assessee was doing business in India through a permanent establishment and, hence, it was not eligible for lower tax at rate of 10 per cent under article 12(2) of DTAA and should be taxed at rate of 20 per cent on gross receipts as per section 9(1) (vii)/44D - Whether since proceedings on record, questionnaire raised a answers given at time of original assessment proceedings showed that before original assessment order was passed, Assessing Officer had specifically raised and examined issue of permanent establishment and held that assessee had no permanent establishment in India, it was a case of mere change of opinion a Assessing Officer had no jurisdiction to reopen assessment - Held, yes”
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In view of the law laid down by Hon’ble Delhi High Court in the
Judgment of Oracle Systems Corporation (supra) and Tracetebel
Industry Engg (supra), we are of the considered view that when no
intangible material co me to the notice of the AO to form the opinion that
the income of the assessee company has escaped assessment rather all
the facts and figures have been brought on record by the assessee
company during assessment proceedings and same have been got
explained by the AO by way of issuance of detailed questionnaire and the
proceeding were completed u/s 143(3) of the Act, the reopening in these
cases have apparently been made on the basis of “change of opinion”
which is not permissible under law.
The contentions of the Ld. DR that decision in these appeals should
be kept in abeyance till the appellate proceeding before Ld. CIT(A) u/s
143(3) of the Act are not completed, is not tenable because these are the
separate proceeding and the assessee as well as Revenue is having
separate cause of action to challenge the reopening. The Judgments
relied upon by the Ld. DR for the Revenue are not applicable to the facts
and circumstances of the case.
In view of what has been discussed above, we are of the
considered view that, without going into the merits of this case, the
reopening in these cases is itself not sustainable, having been made after
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a period of 4 years from the relevant assessment years as the assessee
company has brought on record all the material facts fully and truly
necessary for assessment. So, order passed by the AO/DRP u/s 144/147
of the Act is not sustainable in the eyes of law, hence ordered to be
quashed.
Order pronounced in the open court on 04/7/2018
Sd/- Sd/- (KULDIP SINGH) (G.D. AGRAWAL) PRESIDENT JUDICIAL MEMBER
Dated: 04.07.2018 Pooja/-